Points of View

Manufacturers should focus on supply chain visibility and risk management measures to face a crisis like COVID-19

Mar 23, 2020 Tanmoy Mondal

The world is facing one of the biggest crises of the twenty-first century due to the recent outbreak of COVID-19, which has affected millions of people around the globe, including causing thousands of deaths. The outbreak has severely crippled the world economy. Some of the leading manufacturing hubs of the world, such as China, South Korea, Italy, Spain, and Germany, have implemented strict measures to safeguard their citizens, decreasing the overall manufacturing output. As the leading global manufacturers have several production facilities and supplier relationships in these countries, their manufacturing supply chain has taken a big hit. And many of these manufacturers rely so heavily on these countries that they now have little to no room for maneuvering. In this PoV, we highlight the key lessons from these disruptive events that manufacturers can learn from to bolster their manufacturing supply chain, and we recommend ways for manufacturers to handle a crisis like COVID-19.

 

Global manufacturing activities have come to a standstill

 

As the COVID-19 outbreak has impacted APAC and Europe hard, manufacturing activities across industries have taken a hit. The manufacturing hub of the world, China, is outputting very little, affecting a vast range of industries including automotive, consumer electronics, and chemicals. Several big manufacturers have also stopped production in European countries. For example,

 

  • Volkswagen is planning to suspend production at European factories over COVID-19 fears.
  • Ford and Daimler announced a production suspension at European factories due to COVID-19.

 

Disruption is the new normal

 

We have highlighted some of the recent events that influenced the global supply chain in Exhibit 1. These disruptive events take many forms, and manufacturers must prepare themselves for events over which they have no control.

 

Exhibit 1: The global supply chain has been disrupted several times in the past 10 years 

 

 

Source: HFS Research 2020

 

 

Don’t panic—it’s both a demand-side and supply-side problem

 

Manufacturers often become concerned over production halts due to disruptions. In the short term, it seems like a supply-side problem, but as disruption hits the global economy over a long period, the growth of all industries slows down. As a result of stagnant growth, the overall global economy then faces a demand-side problem. For example, due to COVID-19, experts are anticipating a recession in the near-term. So, manufacturers will receive less demand in the coming days; thus, they do not need their usual peak manufacturing output, but they need to ensure they keep up the supply to meet the necessary demand. Thus, manufacturers should focus on the supply chain responsiveness, including risk management, to prepare for this type of disruptive event.

 

Focus on supply chain responsiveness along with efficiency to tackle major disruptions

 

For a long period, manufacturers have focused on working capital management to increase supply chain efficiency. The “just-in-time” concept became popular because it encourages lean management practices for operating a supply chain. With the increased number of products and variants, faster delivery timelines, erratic demand patterns, and uncertainties in the global economy, manufacturers need to focus on supply chain responsiveness, particularly on supply chain risk management. More emphasis on risk management can limit the working capital efficiency in the near-term but keep the supply chain up and running in the time of disruption, increasing overall efficiency in the long-term.

 

Increase supply chain visibility and control through long-term strategic planning

 

Manufacturers need long-term strategic initiatives to build a resilient supply chain, as described in Exhibit 2.

 

Exhibit 2: Emphasis on every element of the supply chain is the key to success

 

 

 

Source: HFS Research 2020

 

 

Take inspirations from the supply chain leaders

 

Manufacturers can take a cue from the best practices of the global supply chain leaders across sectors. Some of the examples are highlighted in Exhibit 3.

 

Exhibit 3: Enterprises have developed capabilities 

 

 

Source: HFS Research 2020

 

 

The Bottom Line: Manufacturers should maintain a balance between efficiency and responsiveness to design the supply chain

 

Manufacturers need long-term planning to build capabilities (supplier management, raw materials procurement, logistics, production facilities, etc.) across different geographies to minimize the effect of events like COVID-19. These types of events are sudden, and we cannot easily predict them, whereas we can anticipate uncertainties like trade wars. Thus, manufacturers should focus on supply chain visibility and risk management to prepare for different types of disruptive events.